Article / 24 June 2016 at 14:58 GMT

Britain bids AdiEU

FX Consultant / IFXA Ltd
  • US soars in risk-aversion frenzy
  • GBPCAD selling may slow USDCAD gains
  • Month-end portfolio rebalancing drama up next week
The Brexit vote saw the UK reassert a national future for itself 
after 43 years as an EU member. Photo: iStock

By Michael O'Neill

Currencies have recovered from the worst levels seen overnight on the back of profit-taking. There is speculation that central banks may have been actively providing liquidity, but no one has confirmed it. The Brexit vote was expected to be close but Remain was supposed to prevail. 

It didn't.

Brexit is the beginning, not the end

The UK’s disruption of the FX markets is far from over. In fact, it may just be starting. The UK government appears fractured and is a bit of a lame duck until it sorts out its leadership. The leader of the Scottish National Party, Nicola Sturgeon, is fishing for another independence vote. 

Are there any disgruntled EU members who may follow the UK’s lead?

The Brexit vote sparked another round of risk-aversion trading which is coming at a time when Russia and Nato/USA tensions are at elevated levels, the Eurozone refugee crisis still has a full head of steam, China is still trying to manage a “soft landing”, and the Federal Reserve is still warning of higher interest rates. 

The US presidential election, of course, is yet another wild card. In the context of those risks, FX volatility will be the norm.

It isn’t the first time that there has been a “sterling crisis”, and it won’t be the last. GBPUSD hit a low of 1.0520 on March 29, 1985 – the result of the Plaza Accord agreement to devalue the US dollar. Maybe that’s where we are headed.

GBPUSD quarterly from March 31, 1971 until today:

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Source: Bloomberg 

Not seeing the forest because of the trees

Like all the G10 currencies, USDCAD got caught up in the Brexit firestorm and managed to trade almost its entire June range in the span of five hours. For the next few days or even a week, UK issues and GBPUSD/GBPCAD flows will dominate trading and distort FX trading.

The reality is that, for Canada, even though the UK is our third-largest trading partner, that trade represents a mere 3.1% of the Canada/United States amount. Even if it is disrupted while the UK adjusts to its new world order, the impact on Canada will be minimal. It’s not like the UK will stop trading.

Oil prices appear to have stabilised within a $45-$52/barrel range which provides a degree of support to the Canadian dollar. The Bank of Canada, although cautious, expects the domestic economy to rebound in the second half of the year . 

Additional range trading within a 1.2700-1.3100 band is likely with GBPCAD helping to limit USDCAD gains.

GBPCAD looking heavy

GBPCAD has been in a steep downtrend since January and today broke below 1.8080, the 50% Fibonacci retracement level of the May 2013-January 2016 range which re-targets the 38.2% retracement level at 1.7410 and the overnight low of 1.7263. 

In the short term, GBPCAD has lots of room to bounce but gains should be capped at 1.8000 and 1.8350.

GBPCAD one-year with Fibonacci:
Source: Saxo Bank

The week ahead 

This coming week will lack the drama of last week, but the fallout from the UK’s decision to abandon the European Union will keep traders on their toes all week. In addition, the vote has injected an element of political uncertainty into the equation, aside from the Conservative party upheaval. Scotland is already making noises that it wants another referendum to leave the UK. 

GDP is the marquee US data release next week but it will be overshadowed by UK developments as will the other economic releases. The last Federal Open market Committeestatement, which was cautiously dovish, is too fresh to change the outlook and the next FOMC meeting is too far away for this week’s data to matter much.

UK news, developments and data will get closer scrutiny and is likely to be the major driver of G10 FX moves.

Thursday promises to be a very active day thanks to portfolio rebalancing flows for month-end, quarter-end, and half-year end.

The week that was

“Sunday, Bloody Sunday” was the opening track for U2’s 1983 album, War. “Brexit, Bloody Brexit” was the on the lips of scores of FX traders around the globe, for this entire week.

On Monday, following a three-day hiatus from Brexit campaigning due to the murder of an MP, a fresh poll gave the “Remain” side the lead which kicked of a bout of risk-seeking trading. The commodity currency bloc rallied, as did sterling and oil. Gold prices got spanked. If only they had known...

Tuesday, GBPUSD continued its climb and peaked at 1.4780 just before the New York open. EURUSD squeaked out a small gain helped by better ZEW data but for the most part, Brexit overshadowed data releases everywhere. GBPUSD didn’t fare well in New York after another poll reported that the Remain lead was shrinking. Sterling tanked.

The first day of Janet Yellen’s semi-annual testimony to Congress was uneventful as she was as dovish as expected. Oil rose in after hours trading when the API Crude stocks data showed a 5.4-million-barrel drawdown.

Wednesday may have been the eye of the hurricane. USDJPY drifted lower in Asia and then flat lined the rest of the day. EURUSD drifted higher until the end of the day in New York. Oil prices declined when the weekly EIA report disappointed, which lifted USDCAD

Thursday never ended for many traders in Europe, the UK and North America as they worked around the clock. EURUSD drifted higher in Asia and Europe and then spiked higher on the New York open. That move didn’t last and EURUSD retreated but rallied into the close. GBPUSD drifted higher but lacked the enthusiasm of USDJPY, which climbed robustly throughout the session

Friday,(actually very late on Thursday) the Gong Show that was Brexit really got going. At 2200 GMT,  YOUGov released a quasi-exit poll giving Remain the lead. GBPUSD rallied but it was short-lived. When the votes were tallied and Leave was proclaimed the winner, the US dollar and the yen were the only two G10 currencies left standing. 

All the others were lying battered and bruised in the wake of the GBPUSD selling frenzy.

At least the rain has stopped. Photo: iStock

— Edited by Michael McKenna

Michael O’Neill is an FX consultant at IFXA Ltd.
24 June
Clare MacCarthy Clare MacCarthy
Clever headline, Mike :-)
24 June
Michael O'Neill Michael O'Neill
I liked it as well-the credit all goes to Mr. McKenna
24 June
Clare MacCarthy Clare MacCarthy
Canada wins either way :-)


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